- Interest rates may start to decline later this year, making loans less expensive for consumers.
- Some options for tapping home equity may become more affordable.
- There are many reasons to avoid those traditional products, however, and look to a home equity agreement instead.
The high-interest rate era may be drawing to a close, and that could open more options for homeowners.
As you probably know, the Federal Reserve began raising rates in 2022, hoping to put a lid on inflation, which was running at its hottest rate in more than two decades. The Fed has been extremely successful: in the most recent reading, the consumer price index rose just 3.3% compared to a year ago.
Interest-rate cuts may be on the horizon
That’s a bit above the Fed’s comfort zone – the target is 2% – but low enough that investors now expect the central bank will ease up on the highest interest rates it has set since the dot-com bubble. The most respected tool for tracking investor sentiment suggests rate cuts might start in May.
What does that mean for consumers? In a word, relief. Over the past few years, many Americans have found it very difficult to afford anything that has to be financed. That includes home purchases, student loans, and any financial product that allows tapping the equity in their homes.
Home equity loan, HELOC
As an example, home equity loan rates are currently averaging an eye-popping 9%, according to Bankrate. Home equity loans have a fixed rate, so if you’re considering one, it might be best to wait to see if rates do fall. As we mentioned above, that could happen as early as May.
Rates for home equity lines of credit (HELOCs) are roughly the same, although they usually have variable rates, which means they may reset lower if interest rates do move down.
But both types of equity tools require excellent credit scores and represent another lien – a second mortgage – on your property. You must also have a certain amount of equity in the property already to qualify.
The other traditional alternative for tapping equity is a cash-out refinance, in which you take out a new mortgage for your home for an amount more than you have left to pay off on your current mortgage. You pay off the existing mortgage, then pocket the difference, in cash, between what you just took out and what you paid off.
Rates for cash-out refis are usually roughly in line with rates for regular mortgages. At the beginning of February, they averaged just over 7% nationally, according to Bankrate. Most experts expect mortgage rates will decline steadily throughout the year. The Mortgage Bankers Association, for example, forecasts a 6.1% rate for the 30-year fixed-rate mortgage by the end of 2024.
But there are a lot of drawbacks to cash-out refis. For one, the vast majority of Americans have mortgage rates below 5%, which means a new mortgage will almost certainly be more expensive than the current one. That will probably mean a much higher monthly payment, and you’ll be stuck with it for another 15, 20, or 30 years.
What’s more, you’ll have to go through the same time-consuming process you went through to get your first mortgage. You’ll wade through lots of paperwork, and you’ll need a strong credit score and a certain amount of equity already built up in your home. Cash-out refis can be expensive, as well, although you’ll probably be able to fold some of the fees into the loan balance.
Home equity agreement: the no-loan way to tap home equity
While rates may start to ease later this year, then again, they may not. (Remember the recession that everyone expected in 2023?) Many housing experts counsel homeowners to do what’s best for them, rather than trying to time the market. If you feel confident in your job, and you really need the home equity for cash for something specific, you might want to pull the trigger now. If you’re more uneasy and worry the economy may start to go south, you might want to wait and see.
Unlock offers a user-friendly solution for accessing your home equity that isn’t dependent on rates. Our home equity agreements are not loans, so there aren’t interest fees or monthly payments. You don’t need a high credit score, and income requirements are flexible. If you need cash in the current interest-rate environment, it’s worth checking into.
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